Life Insurance

There are four primary reasons to consider Life Insurance:

1. Paying off debt

Life Insurance can be invaluable in alleviating the financial pressures of debt for a family grieving for a loved one.

A mortgage is usually the most significant outstanding debt and a simple insurance policy can cover that in an inexpensive and effective manner.  In most cases a simple “Term” policy is preferred. The premium is a fixed amount for a fixed term (usually 10 years or 20 years). The policy is still in force when the term is up but the renewal premium will then increase for a subsequent term. That increase can be considerable.

As an example: For a 35 year old male non-smoker, $250,000 of life insurance (to cover a typical mortgage) for a 20 year term (with the expectation that the mortgage would be gone by then) would generate a premium of around $27 per month (at current rates).

However, should the insurance still be required at the end of the 20 year term, the premium would increase to $270 per month.

A word of caution on mortgage insurance:

Be very cautious with mortgage insurance offered by lenders such as the banks. This type of insurance usually has “Claims Based” underwriting.  This means that the underwriting is done at the time of the claim (after death) and can lead to denial of the claim based on fraudulent answers to the short 4 or 5 question application form, no matter how innocent “fraudulent answers” may be. Take the time to look at the CBC Marketplace piece “In Denial”:

With lender sourced insurance the amount of insurance coverage reduces as the mortgage reduces, and, MOST IMPORTANTLY, the insurance money is paid to the lender, not to you!

2. Income Replacement

Income replacement insurance can be critical for most families even if both partners are working.  Two incomes are very often required to maintain a family and their lifestyle.  The death of one of the partners can result in real financial strain on the survivor, even if the mortgage has been paid off as described above.

Four years is generally considered a reasonable amount of time to allow the survivor to adapt to the loss of income of their partner.

If we take the same 35 year old male non-smoker as above and assume an income of $85,000 per annum the survivor will need an income replacement of $340,000 over the four years.   If we add that to the $250,000 to cover off mortgage debt the total simple insurance need is $590,000. The monthly premium is now approximately $52 (at current rates).

3. Estate Planning

Ideally, Estate Planning will ensure a swift and tax efficient transfer of assets from the deceased to the beneficiaries.    Insurance, when effectively applied, can be one of the most invaluable methods of achieving this.

An insurance contract contains 3 main parties: The Owner, The Life Insured and the Beneficiary or Beneficiaries.

The Owner owns the policy and makes all the decisions. The Life Insured, also known as the Annuitant, is the person whose death triggers payment of the insured amount. The Owner and Annuitant can be the same person. The Beneficiary receives the insured amount.

Insurance for Estate Planning needs to be permanent insurance, not simple term insurance as described above. Permanent insurance comes in two guises; Whole Life and Universal Life. Universal Life is often considered to be the “Last Great Canadian Tax Shelter”.

The Investment portion of a Universal Life policy will grow sheltered from tax.   Because you can nominate Beneficiaries on the policy you can leave this money to them when you pass on.  This negates Probate Fees, saving money and maintaining confidentiality.

4. Legacies

A grandmother may want to leave $10,000 to each of her 5 grandchildren.   A lifelong supporter of a specific cause may want to leave $100,000 to that cause.

Whatever the cause, whatever the wish, a simple permanent insurance policy can ensure that legacy wishes are respected and funded. Whole Life insurance is ideal for this purpose.

If the beneficiary is a registered charity, the estate of the deceased will receive a Charitable Donation Receipt that will offset taxes payable by the estate.  For example;  capital gains tax may be payable on a gain in the value of a cottage, let’s assume $250,000.00.  Under current rules there might be a tax bill of $60,000.00 on 50% of that gain.  A life policy of $250,000.00 designated for a registered charity would offset the capital gain, thus saving $60,000 in tax payable for the beneficiaries in the will.